Short answer: Because of credibility. The fewer people a group has, the less its own claims predict next year’s cost, so the carrier gives them partial weight and fills the rest with its manual rate; a very large employer’s claims can be given full weight.
Actuarial Standard of Practice No. 25 defines credibility as the predictive value given to a set of data, and describes blending the group’s own experience (the “subject experience”) with broader experience (“relevant experience”). A group can be given full, partial or zero credibility.
The manual rate is that broader piece: the carrier’s rate for a group like this one, built from the carrier’s rating manual for the group’s demographics, location, industry and plan design, before its own claims are considered. A new large group with no usable claims history is priced mostly or entirely on the manual rate.
What it means at a 51- to 100-life renewal:
- A great year is only partly rewarded, because the manual rate still carries much of the weight.
- A bad year is only partly charged, for the same reason.
- Each carrier sets its own credibility scale, so two carriers can price the same claims history differently.
Ask each carrier what credibility percentage it applied and what manual rate it blended with. That is often where competing renewals differ most.